Fifteen years ago, a not so subtle gentleman with an important voice—he ran the book-order department of Barnes & Noble—asked the CEO of Henry Holt to participate in a TV advertising campaign for the chain, to the tune of $50,000. The CEO, for his part, was hoping to sell lots of copies of Thomas Pynchon’s Mason & Dixon, as he’d just learned from the happy salespeople at Henry Holt that the bookseller was set to display at least 20,000 copies of that marvelous tome in stores across the country. (I know this because, at the time, I was Holt’s CEO.) And so he asked Barnes & Noble, “Would your ad refer to Pynchon’s new novel?” The reply was unequivocal: “No.” In that case, the CEO inquired, “what’s the point of Holt’s contribution?” Barnes & Noble’s response: “Well, if you can’t come up with the sum, we’d order only half as many Pynchons.” And so they did.

About the Author

Michael Naumann, the editor in chief of the German magazine Cicero, has also been a publisher, journalist and—...

Perhaps they realized that Pynchon was not the mass-market author they had pinned their hopes on. Leonard Riggio, Barnes & Noble’s chair at the time, had announced at a panel that his brother Stephen (his designated successor) had started to read the book and didn’t get beyond the first fifty pages or so. It was the one time I’d ever heard the company engage in aesthetic criticism, and it served only to obfuscate B&N’s business practices.

Whatever price it may have been charging for Mason & Dixon, Barnes & Noble stuck by its decision and probably suffered a loss. At the time, its business as a bricks-and-mortar bookstore had not yet been seriously undermined by Amazon, yet both companies were already deeply entrenched in a war over a sales strategy based on an economy of discounting—selling bestsellers at a loss in order to attract customers.

Discounting has upended traditional publishing in the United States. Independent bookstores usually operate on a shoestring and have never been able to afford negative profit margins on bestsellers. During the 1990s, as the major chains expanded and bookstores—and booksellers—emerged on the Web, many independents were ruined by the downward pressure on the price of bestsellers. By discounting these books, the big chains and Amazon did to the independents what Walmart has done to mom-and-pop Main Street retailers: crush them by running a race to the bottom. But there was more collateral damage. In time, discounting also deprived American readers of the opportunity to read foreign authors of a high literary reputation because, in an aggressively commercial publishing environment, translations are often risky and expensive. In the words of a high-ranking CEO in New York, “I don’t publish manuscripts I cannot read.”

What I learned at Holt, albeit a little late, is that publishing and selling books in the United States was, and remains, a very different and far rougher business than in my home country of Germany, where since the late nineteenth century a fixed-price agreement between publishers and bookstores has defined a less competitive and highly regulated publishing market. The participants in this voluntary price cartel signed a mutual agreement: publishers set the prices on books, and bookstores abided by them. The arrangement resembled a prenuptial agreement between both sides, based on trust, notarized by a lawyer’s office and armed with expensive sanctions.

The agreement was deeply engrained in Germany, and in 2002 it became the law. Publishers list new books, prices included,y in a database that currently contains around 1.2 million titles. An office of lawyers near Frankfurt, appointed by the Publishers and Booksellers Association, monitors the adherence of all participants to the agreement: every breach of the contract can be punished by a fine of up to €6,000, enforced by a higher court. As you might expect, a black-sheep syndrome keeps the lawyers busy. Anonymous booksellers on the Internet offer so-called “used” books at a discount, some of which have been stolen from printers or warehouses.

From a publisher’s point of view, fixed-price has some obvious benefits. It allows large and medium-sized publishing houses to nourish seemingly “unsellable” authors—anyone whose book isn’t a potential blockbuster. The profitable sales from a house’s bestselling authors provide the income to bet on a dark horse like Herta Müller or José Saramago, and if such an author wins a big prize, especially the Nobel, sales surge and everybody is happy. (Except, of course, the literary agents, who pout that publishers are freeloading on their hot authors, forgetting that most of their clients never sell enough books to earn back their guaranteed advance.) Because of the solid margins on their bestsellers, publishers can also stock a decent inventory of books by their leading authors. When Toni Morrison was awarded the Nobel in 1993, her German publisher had on hand copies of the hardcover and paperback editions of all her novels.

At least three classes of publisher have flourished under the fixed-price system. The first is the publisher with “a cause” rooted in political or literary ambitions. A few of these publishers are survivors of the 1960s and have since branched out into special editions of old masters. This exemplary company of literary entrepreneurs includes houses like Stroemfeld, and it concentrates on complete, highly academic editions of authors such as Heinrich von Kleist, Friedrich Hölderlin and Franz Kafka. Most operate by self-exploitation: salaries are low, and the threat of insolvency constantly hovers over their little businesses. Each year the government awards one of them the Kurt Wolff Prize, worth €26,000 and named after Kafka’s original publisher. Wolff, his wife Helen and their son Christian barely escaped the Nazis in the early years of World War II. Endangered because his mother was Jewish, and because he was closely affiliated with his mostly Jewish and “degenerate” authors, Wolff fled occupied France with his family in February 1941, first for Spain and then New York City, where he and Helen founded Pantheon Books the following year. (The couple returned to Europe in 1960.)

The second class of publishers is composed of purely commercial houses betting on bestsellers and counting on the financial cushion of a conglomerate parent like Bertelsmann. The third class is more interesting: these publishers survive by cultivating a list that mixes commercial tastes with classical literary ambitions. Three such publishers are owned by Holtzbrinck, which also owns the American firms Henry Holt, St. Martin’s Press, Macmillan, and Farrar, Straus & Giroux. (Random House, which counts among its imprints the legendary Alfred A. Knopf, has been the property of Bertelsmann since 1998.) In Germany, the Holtzbrinck house Rowohlt, where I was publisher from 1985 to 1995, has specialized in American and British authors for almost a century. Rowohlt’s commercial imprint, Wunderlich, has been fortunate to feature on its list the British novelist Rosamunde Pilcher, author of the bestseller The Shell Seekers (1987). Translations of Pilcher’s romance novels—English girl falls in love with reluctant gentleman of middle-class origin—have sold more than 15 million copies in Germany, and the profits have helped to finance complete editions of Vladimir Nabokov, Jean-Paul Sartre, Ernest Hemingway and, recently, Harold Brodkey. Fixed-price has allowed Rowohlt to spread the risk in a business with a traditionally long-term perspective and small profit margins. Today, Rowohlt thrives on bestsellers by Jonathan Franzen and, more recently, the celebrated Hungarian author Péter Nádas, whose 1,700-page novel Parallel Stories, brilliantly translated into German by Christina Viragh, should put him on the shortlist for the Nobel.

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Since the late 1840s in Germany, the ambiguous character of books—simultaneously a commodity and a cultural work—has defined internal discussions in the publishing business. Putting aside the implicit hubris of German nationalism, the country’s self-aggrandizement as a veritable Kulturnation, the fact remains that in Germany the cultural definition of the “book” as a major source of intellectual, scientific, economic and aesthetic self-improvement has carried the day over the capitalist notion that a book is a commodity and therefore deserving of no special considerations. The book as such is sacred. One does not throw books away.

Blanket protection came in 1888, in the form of a fixed-price agreement devised by the German Book Traders’ Association. The agreement concluded endless debates and skirmishes between publishers, large mail-order companies and traditional booksellers in smaller communities. Like Amazon and the big chains in the United States today, the mail-order houses had flooded the market with discounted books, ruining provincial bookstores.

When the fixed-price agreement was struck, Germany’s numerous kingdoms and dukedoms had existed for sixteen years as a united nation under a kaiser, a central government and a weak parliament. But the diversity of regional cultural and religious traditions persisted; to this day regional diversity in the arts is reinforced by annual state subsidies of roughly €12 billion as well as numerous tax advantages—for example, books, newspapers and theater tickets are subject only to half of the 19 percent VAT (value-added tax). Books, magazines, music and other artistic institutions (including hundreds of opera houses and theaters) helped to unify a country that had entered the industrial age almost fifty years after France and England. Massive social changes concomitant with rapid industrial growth fostered a romantic yearning for the past: hence, German Angst. The collected works of Goethe, Schiller and Heine became decorative emblems of the middle class, part of the intellectual furniture. At the end of the nineteenth century, Bildung, or education, became a core project of the socialist movements and their Arbeiterbildungsvereine, or workers’ educational clubs. Books and pamphlets were deployed as indispensable weapons of the class struggle during Bismarck’s years as chancellor. Socialist book clubs provided their members with discounted volumes. The last such club to be established—the Büchergilde Gutenberg, founded by trade unions in 1924—was privatized in 1998 and lingers on as a shadowy reminder of a once robust literary tradition: book clubs now account for only 2 percent of national book sales.

As mentioned earlier, in 2002 this fixed-price agreement became federal law. Stressing the cultural relevance of the book industry, the law grants publishers the right to set a price on all new books, hardcover or paperback. After eighteen months, the publishers may lift the fixed price, announcing the change in trade publications. Some loopholes in the earlier agreement—such as the selling of “damaged books” (which in fact were undamaged) at lower prices—were closed in 2002. The fixed-price law was revised in 2006 to cover all points of sale, including Internet shops like Amazon and e-books (except for those enhanced by add-ons such as videos, pictures and other gimmicks). One outcome of the fixed-price law has been the growth of a new online market for used books: approximately 100,000 titles are now available. The flourishing of this market is a clear indication that the backlist business of German publishing has declined dramatically since the passage of the fixed-price law. Whereas in the 1980s the backlist accounted for nearly 30 percent of the sales for hardcover books, today that share has fallen to 5 percent. It is also illegal to export German books to neighboring nations without fixed-price laws in order to reimport them and sell them more cheaply. (Fixed-price agreements are also in place in France, Greece, Italy, the Netherlands, Austria, Portugal and Spain.)

The transformation of a voluntary pact into federal law was brought about by the European Commission, albeit involuntarily. In 1999 the EC tried to abolish fixed-price agreements in Germany on the grounds that they were the creation of a price-fixing cartel and therefore violated the European Union’s antitrust laws. However, the Amsterdam agreement of 1997 had limited the EU’s power to force the traditional trade practices of its member nations into accordance with the EU’s transnational trade laws. As Germany’s minister of culture at the time, I was involved in bazaar-like negotiations, including the threat of a German veto of the EU’s minuscule cultural budget, to stop the commission’s attack on fixed-price arrangements. That the German book industry had an army of lawyers lobbying top bureaucrats in Brussels didn’t harm our case. As it turned out, the members of that incarnation of the European Commission ended up resigning en masse under a cloud. Its French member, Edith Cresson, who had served as prime minister under François Mitterrand, was accused of nepotism, having appointed a dentist friend as an adviser—but that is another story, worth a novel with teeth. (Perhaps someone in France has already written it.)

In Brussels our main defense of fixed-price was the cultural relevance of books in Germany. For more than a century the so-called cartel has not impeded competition. In Germany, approximately 90,000 new books are published each year, which per capita is about four times as many as in the United States. Among the new books of 2010 were 11,349 translations, including 6,993 English-language titles. Additionally, average book prices in Germany are the lowest in Europe, with the possible exception of Iceland and Finland. This ignominious “cartel” seems to be working to the advantage of readers, publishers, bookstores and authors, especially those who cannot expect total sales of more than 3,000 copies. The cultural advantage of this arrangement is obvious. Bestsellers—whether by Stephen King or Günter Grass—sell at the same price anywhere, guaranteeing the survival of independent booksellers. The small profit margin on bestsellers allows bookstores to keep in stock high-quality, low-selling titles. They can also write off on their income tax up to 90 percent of unsold books kept in stock for no more than three years. Without this tax advantage, which costs the German version of the IRS billions of euros, at least a third of Germany’s independent bookstores would disappear within twelve months.

By turning the fixed-price agreement into law, Germany meant to send a signal to the Eurocrats in Brussels: the entire Bundestag stands behind this national practice, so attack it at your peril. Even so, since 2002, the EU has continued its assault on fixed-price, lobbied no doubt by Amazon and the German book chains.

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With a population of 82 million, Germany is a knowledge-based, economically successful society with around 2,000 publishing companies and more than 3,500 serious independent bookstores staffed by licensed booksellers (most of whom have completed an apprenticeship of up to three years, including vocational training in cultural history and economics). In Berlin, a city of 3.4 million people, close to 300 bookstores provide outlets for more than 400 publishers. The typical neighborhood bookstore in Germany has two employees, possibly three, and some of them know their bookselling history: there must be at least ten shops in the country named Shakespeare and Company, in tribute to the legendary bookstore established in Paris in 1919 by Sylvia Beach, the original publisher of Ulysses.

To be a bookseller in Germany carries social prestige. It is a job dominated by women, most of whom have a college degree. Quality bookstores provide their customers with good advice and regular nightly readings by authors, usually charging a €5 fee per person. They can fill orders quickly as well: for more than four decades most German bookstores have been electronically connected to wholesalers, who guarantee that any book not stocked by a store will be delivered within a day, sometimes within a few hours. Considering that Germany is about the size of Montana, this is not surprising.

Yet despite the many strengths of traditional bookstores, their share of the annual volume of book sales—€9.7 billion in 2010—has been declining and now stands at 50 percent. Direct Internet sales from publishers to readers account for 18 percent of annual volume these days. Sales through Internet bookstores are marching on: the annual share has grown from 8.9 percent in 2007 to 13.8 percent in 2010.

Bookstore chains started to make inroads into the market in larger cities twenty years ago. The largest chain, Weltbild, has 350 outlets; owned by the Catholic Church, it is currently for sale. The cardinals and bishops have taken umbrage at Weltbild for offering “erotic books,” another example of the Church’s conservative retreat, under a German pope, into religious piety and spiritual escapism. The second-largest bookstore chain, Thalia, is owned by Douglas, a German perfume and jewelry retailer. Thalia is pursuing a “multi-channel” strategy, selling books online and buying large old-fashioned bookstores, following the example of Barnes & Noble. Thalia employs more than 5,000 people, and its 2010 sales amounted to €934 million. In 2007 the Publishers and Booksellers Association launched a website called libreka!; it has been designed to avoid the mistakes of the record industry, which allowed iTunes to dominate the digital market by selling songs for 99 cents. Any German bookseller or publisher can offer its e-books on libreka!, and the association will handle all of the back-office work on a sale, accounting included.

Because of fixed-price, Amazon faced a tough business environment when it opened in Germany fifteen years ago. And conquer Amazon has not, unless you consider a total market share of 13.8 percent for Internet sales—which also includes the sales of smaller Internet competitors like Thalia—to be a resounding victory. But Amazon has hardly been quiet. It operates six gigantic warehouses in Germany and is building two more near the towns of Pforzheim and Koblenz, which will employ more than 3,000 people, two-thirds of them on a seasonal basis. In Germany books are no longer Amazon’s leading product, nor with fixed-price could they have ever been a truly profitable line. But books were Amazon’s Trojan horse, introducing the retailer to the German consumer market and enabling it to establish a foothold in the country’s huge mail-order business.

Just as in the United States, Germany is experiencing a monumental cultural change in communication. Kindles, iPads and similar devices have entered the market. Copyright laws are being challenged by a new party, the Piratenpartei (Pirate Party), which will alter the political spectrum. For the Pirates, fixed prices on any means of communication, books included, are unjust. Information, they say, wants to be free. The party has the support of 13 percent of voters, making it eligible to gain a seat in the Bundestag in 2013. Most of its supporters are part of the Facebook generation (the site has approximately 22 million users in Germany).

With its common currency being tested by the recession, the European Union and its bureaucrats have much larger issues to grapple with than pleas to revisit fixed-price laws for books, so black letters printed on paper will remain a major staple of Germany’s culture. As a German publisher once said, looking at the newest version of Kindle: “One should not take a technical instrument into bed.”